Owens Corning (OC) Q4 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Owens Corning Earnings Conference Call. My name is Keisha, and I will be your operator for today. [Operator Instructions] I would now like to hand the call over to Mr. Michael McMurray, Vice President of Investor Relations and Treasurer. Please proceed.

Thank you, Keisha. Good morning, everyone. Thank you for taking time today to join us for today's conference call and review of our business results for the fourth quarter and full year 2010. Joining us today are Mike Thaman, Owens Corning's Chairman and Chief Executive Officer; and Duncan Palmer, Chief Financial Officer. Following our presentation this morning, we will open this one-hour call to your questions. Please limit yourselves to one question and one follow-up. Earlier this morning, we issued a news release and filed a 10-K that detailed our results for the quarter and the year. For the purposes of our discussion today, we’ve prepared presentation slides that summarize our performance and results for the fourth quarter and full year 2010. We will refer to these slides during this call. You can access the slides at owenscorning.com. We have a link on our homepage and a link on the Investors section of our website. This call and the supporting slides will be recorded and available on our website for future reference. Please reference Slide 2. Before we begin, we offer a couple of reminders. First, today's presentation will include forward-looking statements based on our current forecasts and estimates of future events. Second, these statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially. Please refer to the cautionary statements and the risk factors identified in our SEC filings for a more detailed explanation of the inherent limitations of such forward-looking statements. This presentation and today's prepared remarks contain non-GAAP financial measures. Reconciliations of GAAP to non-GAAP are found within the financial tables of our earnings release. For those of you following along in our presentation, we will begin on Slide 4. And now, opening remarks from our Chairman and CEO, Mike Thaman, followed by CFO, Duncan Palmer, and then our Q&A session. Mike.

Thank you, Michael, and good morning, everyone. Thank you for joining us today to discuss our results for the fourth quarter and full year 2010. Owens Corning completed another successful year. Our portfolio of market-leading businesses delivered strong profitability, despite markets that continue to perform well below their potential. This performance was highlighted by an impressive turnaround in Composites and continued strong performance in Roofing. For the year 2010, adjusted earnings per share totaled $1.57, a 38% increase compared with 2009, and adjusted EBITDA of $381 million represented a 24% increase over the prior year. The substantial growth in earnings was achieved on a 4% increase in revenue, which totaled $5 billion for the year. It feels good to report positive top line performance. As we enter 2010, we outlined a number of important objectives for the year. I'd like to spend a few moments sharing my assessment of our achievements in these key areas. We said that we would continue our progress in creating an injury-free workplace. Our rate of injuries improved by 23% last year, marking our ninth consecutive year of safety improvement. Over this period, we've reduced the number of injuries by more than 90%. This is tremendous execution by all of the people of Owens Corning. We said in our third quarter guidance that EBIT would be in the $360 million to $390 million range. Today, we reported full year adjusted EBIT of $381 million. We said that we would return our Composites business to profitability. Adjusted EBIT in Composites was $175 million last year compared to a loss of $33 million in 2009. This represents more than 75% operating leverage on revenue growth. Needless to say, we are very proud of this result. We said that our Roofing business would achieve operating margins greater than 20%. With actual margins of 22%, we accomplished this objective as well. We said that although Insulation was likely to again lose money, we did expect to narrow our losses. We fell short on this objective. As you know, weak U.S. residential construction levels continue to challenge the entire market. As a result, adjusted EBIT for installation was basically flat with 2009. While we would have liked to see more progress in installation, I believe that we've took important actions to improve our outlook for 2011. I will speak more about this later in my prepared remarks. Finally, I was pleased that we were able to complete the divestiture of Masonry Products to Boral at year end. This transaction demonstrates our ongoing commitment to evaluate our asset base and to drive return on capital for our shareholders. Overall, I'm pleased with what we accomplished in the face of continued weakness in U.S. housing market and the still recovering global economy. Our execution and financial performance were strong, and we are positioned well entering 2011. Now I'd like to turn to the businesses and our outlook. Composites executed an impressive turnaround in 2010, laying the foundation for an even stronger year in 2011. Our newly installed capacity in Hangzhou was up and running at year end, and will enable us to further capitalize on demand growth in China, positively impacting earnings during the first half of the year. In addition, we are on track to complete the expansion of our facility in Gous-Khroustalny, Russia by the end of the year, which will further strengthen our global Composites footprint. Driven by global industrial demand, particularly in developing countries, we expect Composites to deliver another year of double-digit revenue growth. With the addition of our China facility, we should have another year of strong operating leverage. With expected EBIT to grow by $75 million. This translates into further margin expansion, with EBIT margins in the low double-digits this year. Roofing marked another year of strong profitability, producing EBIT of $405 million and margins in excess of 20%. These accomplishments were achieved in spite of the weakest market in decades, which was punctuated by a dramatic decrease in demand from the end of June through the year-end. In Roofing, our contribution margins continue to be healthy, and support our expectation that EBIT margins of 20% are achievable in 2011. While we were a bit surprised by the magnitude of the decline of the Roofing market last year, we believe that the market has bottomed and that we should experience improvement this year. However, we are expecting that volumes will comp negatively in the first half, followed by a stronger half than we experienced last year. Turning to our Insulation business our team has taken aggressive action to address the financial performance of this business, which continues to be challenged by weak U.S. residential construction levels. Last month, we introduced our revolutionary EcoTouch insulation at the International Builders' Show. This is an industry-leading residential and commercial insulation product made with 99% natural materials. Our customers have responded positively to our message of, "Green without compromise for the installer, for the builder and for the homeowner." In addition this week, we announced an agreement with Masco that broadens our relationship and designates Owens Corning as the primary insulation provider to their contractor services business. Owens Corning has a long history with this business that in some cases dates back to their startup of their operations even prior to being acquired by Masco. In recent years, our position with Masco, the largest installer in the industry, had been well below our overall market position. Being chosen by Masco as their primary supplier will allow us to broaden our reach across all segments of the Insulation Contractor business. We see Insulation a historically strong business that's been underperforming due to the weak U.S. housing market, embarking on a measured path to recovery in 2011. We believe that our operating performance should improve this year, that the cost of the EcoTouch conversion should begin to abate by the end of the second quarter, and that we should see improved volumes in the second half associated with a gradually improving housing market. From a company-wide perspective, we are positioned to deliver $475 million in EBIT for the year. This translates to another year of more than 30% growth in adjusted EPS. Looking further ahead, we remain committed to the goals that we shared at our Investor Day in November: $1 billion of cumulative free cash flow between this year and 2013; and $1 billion or more in adjusted EBITDA in 2013. Our 2011 financial goals are consistent with progress towards these two important targets. We've delivered on our commitment to provide strong performance in 2010, despite the challenging backdrop. And we expect continued strong performance this year with each of our three primary businesses poised to benefit from growth. As I've said before, we're thrilled to be operating great businesses in great markets. We have a strong team that is committed to winning with our customers around the world. As the economy and our markets begin to recover, we see multiple paths for Owens Corning to drive additional earnings this year and beyond. With that, I will now turn to our CFO, Duncan Palmer, for a more detailed look at our 2010 financial performance and our outlook for 2011. Duncan?

Thanks, Mike. Let's start on Slide 5, where we show our key financial data for the year and for the quarter. You will find more detailed financial information in the tables of today's news release and the Form 10-K. Today, we reported 2010 consolidated net sales of $5 billion, a 4% increase compared to 2009. This was highlighted by our Composites segment, which increased sales over last year by 17% on consistently stronger global demand. In a moment, I will review our reconciliation of items to get to adjusted earnings before interest and taxes, adjusted EBIT. As a reminder, when we look at period over period comparability, our primary measure is adjusted EBIT. Adjusted EBIT for 2010 was $381 million, up 24% from $308 million in 2009. Results for the year continue to demonstrate the strength of our business portfolio and our ability to execute in challenging markets. Adjusted earnings for 2010 were $199 million, or $1.57 per diluted share, as compared to 2009 adjusted earnings of $145 million or $1.14 per diluted share. This represents a 38% increase. For the fourth quarter 2010, adjusted EBIT was $64 million, compared to $33 million for the same period in 2009, driven by the sustained improvement in our Composites segment. Adjusted earnings for the fourth quarter of 2010 were $29 million or $0.23 per diluted share. Depreciation, amortization expense totaled $320 million for the year, which was in line with our guidance. Based on the recent investments that we have made, we estimate that our 2011 depreciation, amortization expense will be about $340 million. Our capital expenditures for 2010 totaled $314 million compared with $243 million in 2009. And we anticipate the capital expenditures will be around $400 million in 2011. We continue to demonstrate strong cash generation and produce $488 million of operational cash flow during the year. This has enabled us to fund our capital projects, repurchase $117 million of our stock and reduce our net debt by $82 million during the year. I will talk further about our 2010 stock repurchases later in the presentation. On Slide 6, we reconcile full year 2010 adjusted EBIT of $381 million to reported EBIT of $206 million. Moving to Slide 7, you can see the reconciliation of our fourth quarter adjusted EBIT of $64 million to a reported EBIT loss of $71 million. In December, we reached a definitive agreement with Boral Industries to sell the Masonry Products business for a minimum of $90 million, of which $45 million was received in 2010. Associated with the sale, we recorded $114 million in non-cash charges, reflecting the higher carrying value assigned to this business in 2006, in connection with fresh start accounting. During the quarter, we had $15 million of charges related to cost reductions and other actions. Next on Slide 8. You will see an illustration of how full year adjusted EBIT performance has evolved from 2009 to 2010, based on business contribution. Adjusted EBIT increased $73 million from 2009 to 2010. Our Composites segment increased EBIT by $208 million over 2009, as a result of stronger end market demand, impressive operating leverage and higher selling prices across our markets. This improvement was partially offset by EBIT declines in our Roofing business. We incurred $75 million in general corporate expenses in 2010, which is slightly lower than the guidance we provided. In 2011, general corporate expenses are expected to be between $80 million and $90 million. Now if you move to Slide 9, you will see adjusted EBIT performance comparing fourth quarter 2010 with the same period in 2009, also based on business contribution. Adjusted EBIT increased $31 million from the fourth quarter 2009 to fourth quarter 2010. Consistent with the full year, our Composites segment delivered significantly more EBIT in the fourth quarter 2010 as compared to the same period 2009. This was offset by a decline in profitability of the Roofing business due to lower margins year-over-year, that resulted from higher asphalt costs and slightly lower selling prices. With that as background, turn to Slide 10, and we will begin a more detailed review of our segments starting with Building Materials. In the fourth quarter, Building Materials net sales was $717 million, a 4% decrease on the fourth quarter 2009. Building Materials delivered $9 million dollars in EBIT for the fourth quarter 2010, which was $40 million less than the same period in 2009. As we look to 2011, we expect improving market demand for Building Materials across all of our major markets, particularly in the second half of the year. The first half of 2010 was positively impacted by the first-time homebuyer tax credit and inventory build in Roofing's distribution channels, and therefore, we expect that demand comparables in the first half of the year will be challenging, particularly in Roofing. The following two slides present the results in more detail, by highlighting the businesses within the Building Materials segment, the Roofing business and the Insulation business. First, Slide 11 provides an overview of our Roofing business. Roofing sales for the quarter were $340 million in line with fourth quarter 2009, consistent with our historical experience we had seasonally weak demand in the fourth quarter. Full-year 2010, overall demand for the U.S. shingle market was down approximately 10% from 2009. The strong margin performance that began in the fourth quarter of 2008 continued for the full year 2010, as Roofing delivered EBIT margins of 22%. We have achieved over $150 million of annual benefits since 2007 through actions we have taken. These benefits have contributed to our business maintaining margin performance despite the weakness in the U.S. shingle market. We experienced an unprecedented distribution of demand in 2010, about 60% of our revenues were in the first half of the year and 40% in the second, as compared to the 10-year average, which would be about 50/50 between the two halves. This fact has had an impact on both our EBIT margins for 2010 as well as our outlook for 2011. Let me start with the impact on 2010 EBIT margins. Despite the decline in demand in 2010, contribution margins, defined as price less variable cost of goods sold let including freight, have remained relatively healthy and stable and supported annual EBIT margins of 20% or more. However, variations in demand will cause volatility in EBIT margins despite stable contribution margins, as fixed costs are distributed relatively evenly throughout the year. In the third and fourth quarter 2010, lower sales and slightly lower contribution margin reduced EBIT margins. In the fourth quarter, we also sold high cost inventory resulting from the low production in the third quarter. As a result of these factors, the EBIT margins of 11% in the fourth quarter were in line with our expectations. Now let me turn to outlook for 2011. We expect the shape of sales and production to return to a more normal pattern. Recall that during the first and fourth quarters, demand is typically lower owing to weather-related seasonality. As a result, we expect that the first and fourth quarters would have lower EBIT margins even with stable contribution margins. However, based on the contribution margins we have demonstrated in the fourth quarter 2010, combined with recently announced price increases, we believe that full year EBIT margins of 20% are achievable in 2011, without a significant increase in market demand. Next onto Slide 12. Insulation sales for the fourth quarter were $379 million, a decrease of 9% from the fourth quarter 2009. The Insulation business experienced lower year-over-year demand across many of our end markets. And despite this broad market weakness, we have been heartened by the selling price increases that impacted results in the second half of the year. EBIT for the fourth quarter 2010 decreased by $5 million as compared to the same period in 2009. Insulation results were negatively impacted by lower sales volumes and by investments in technology developments associated with EcoTouch. In response to the prolonged weakness in demand, our glass fiber capacity utilization has been about 50% for the year. In fourth quarter, as part of our disciplined capacity management, we took actions to idle two manufacturing facilities within our insulation network to further reduce fixed costs. Although we are expecting the U.S. housing market to improve in 2011, we are entering the year with lagged U.S. housing starts that are comparable to this time last year. And therefore expect, that our first quarter demand will be in line with first quarter 2010. We expect that 2011 U.S. housing starts will be less than 700,000 and will improve in the second half of the year. We also expect to see incremental revenue in 2011 from our announced relationship as the primary supplier to Masco. Based on this outlook, we expect that 2011 Insulation revenue will grow at a rate of about 10% from 2010. In addition, we are excited about the recent launch of our EcoTouch installation. Despite the technology investments and plant conversions that the business will continue to make in the first half of the year related to EcoTouch, we believe that the Insulation business will narrow its losses in 2011. We continue to believe that this business will display about 10% compounded annual growth in revenue over 2011 to 2013 and 50% operating leverage over this period. As I remind you on each of our quarterly calls, this is a great business and a well structured industry. Owens Corning's PINK FIBERGLAS Insulation is a powerful and enduring brand. We are the clear market leader, well-positioned to return to historical levels of performance when demand improves, as we know it will. As a result of the fourth quarter divestiture of the Masonry Products business, we will no longer report other building materials as a separate component within the Building Materials segment. The other businesses that were included in other Building Materials are reported within our Insulation business. We have recast our historical results within this presentation, as well as in the 10-K, to reflect this change. Next, Slide 13 provides an overview of our Composites segment. Composites sales in the fourth quarter 2010 were $475 million or 7% higher than the same period in 2009. This increase was primarily the result of more shipments across most regions in our Reinforcements business, as global demand remained consistently strong. In addition, selling prices for Reinforcements products across all of our regions have improved since the fourth quarter 2009, and this has contributed to the improvement in profitability year-over-year. In the fourth quarter 2010, Composites achieved 12% EBIT margins and delivered $59 million in EBIT, driven by increased selling prices and strong operating performance. We are extremely pleased with the impressive results of this business, which has shown more than 75% operating leverage from 2009 to 2010. While we don't expect this degree of operating leverage to sustain, we do expect a positive momentum in Composites to continue in 2011, with double-digit revenue growth and strong operating leverage. In addition, our newly installed capacity in Hangzhou, China, has begun operations, which will allow us to capitalize on a market with strong growth. This expansion will contribute significantly to EBIT in 2011, starting in the first half. We expect that EBIT in the first quarter 2011 will be well ahead of first quarter 2010. However, we do expect that the startup costs associated with this facility, as well as other expansions and product conversions, will cost first quarter 2011 EBIT to be sequentially down from fourth quarter 2010. As previously announced, to capitalize on market growth, we are expanding our Reinforcements facility in Russia, which is on target for startup by the end of 2011. Based on these factors, we are confident that EBIT can increase by $75 million and that the business can produce low double-digit EBIT margins for the full year. We have a few additional items to cover. Now to Slide 14. We repurchased 4.2 million shares of the company's stock for $117 million during 2010, at an average price of $27.85, which included 550,000 shares in the fourth quarter. These purchases were made under the previously announced buyback programs. As of December 31, 2010, 7.7 million shares or 6% of the company's outstanding remained available for repurchase. We expect to complete current authorization by the end of 2012. This represents a return of capital to our shareholders that reflects our strong outlook for earnings and free cash flow generation. We believe that our $2.4 billion tax NOL asset has delivered cash savings of about $140 million for the period of 2009 to 2010. These ongoing savings underpin the present value of the NOL, which we estimate to be approximately $650 million. Due to our favorable tax position, we incurred only $16 million in cash taxes in 2010 and expect to incur less than $30 million in 2011. In addition, we believe that our effective book tax rate for full year 2011 will be 28%, with some fluctuation quarter-to-quarter based on a blend of our U.S. and non-U.S. operations. As a result, we anticipate showing adjusted earnings in 2011, using 28% as we did it in 2010, based on an adjusted effective tax rate of 25%. Our 2010 earnings were impacted by significant non-cash income tax items. During the year, we reversed $937 million of valuation allowances against certain of our deferred tax assets, which were originally established in 2008. During 2010, we implemented tax planning strategies to enhance the value of our advantaged tax position, and increase our global tax reserves associated with these strategies. The impact of these items have been removed to arrive at adjusted earnings. Now on Slide 15. We are extremely pleased with our results in 2010. In challenging markets, we were able to deliver adjusted EPS growth of 38%. For 2011, we expect improving demand in all of our major markets. The Composites business is positioned to benefit from growing markets and the startup of our new facility in China. In Building Materials, we believe that both Roofing and Insulation will benefit from a strengthening market, particularly in the second half of 2011. This positions Owens Corning to deliver $475 million of adjusted EBIT, which translates to growth in adjusted earnings per share of more than 30%. Further, on Slide 16, this performance puts us on track to deliver on our goals of reaching $1 billion or more of EBITDA in 2013 and $1 billion of cumulative free cash flow over the period from 2011 to 2013. And with that, Michael, back to you for Q&A.

Thank you, Duncan. Keisha, we are now ready to begin the Q&A session.

[Operator Instructions] Your first question comes from the line of Josh Levin with Citigroup.

When you think about Roofing for the full year of 2011, not much capacity is coming online in the industry. Volumes will probably go up due to a greater demand, pricing has been relatively stable, the industry is trying to push through some price increases. So why should Roofing margins go down at all in the full year relative to 2010, it's just an asphalt cost for you?

Josh, this is Mike. I think Duncan, in his prepared remarks, talked a little bit about the fact that while Roofing prices have been relatively stable since the third quarter of 2008, we have seen some quarter-to-quarter fluctuation. And with the weakness that we saw in demand in the second half of last year, we continue to believe that we see contribution margins entering this year that support 20% operating margins, on the one hand. On the other hand, we are seeing inflation and some other things as going to need to get passed through into the market in the form of price, in order for us to keep those contribution margins stable and solid. So we don't want to get ahead of ourselves and advertise or promote an operating margin number that was above, kind of what we've seen as our near-term goal of keeping the business at 20% operating margins. So we felt comfortable coming in to the year, that 20% was a good goal for us, given all the factors that we see in the market. I do embrace a number of the positives you pointed out, though, which is we do think we should see more stable and predictable demand in 2011, which should help us operationally. And I think, should help us and our customers function a little bit more effectively, in terms of managing price.

We had a long hard winter in many parts of the country. How do you think that might affect storm-related demand for shingles? And when will you have some visibility into that?

It's a great question, and I think one that we're asking our sales force about, really, every day. In the near term, I can tell you over the last three or four weeks, the very difficult weather has probably created a little bit of challenges in terms of shipments. A lot of our customers today, their yards are full of snow or big piles of snow, their ability to take in inventory or to ship our product is pretty limited, given the amount of snow that's up on roofs and the amount of snow that's on the ground. Conversely, I mean, we're definitely hearing and reading articles and a lot of papers in New England through the Midwest and down to the center of the country, that there's a lot of ice damming, that there's a lot of roof damage, that there's a lot of homes that are going to need to be repaired. So we would expect after a very difficult winter that the contractors should come out of the gates relatively strongly when the snow melts, and then that should help our distributors with their at-the-door sales, which would then draw through more of our products. So we, net-net, heavy winter should be positive for the business. I think in the near term it's kind of slowing down a little bit of activity between us and distribution points.

Your next question comes from the line of Michael Rehaut with JPMorgan.

This is actually Will Wong on for Mike. I have a quick question about the Insulation business. In 2010, you guys had higher cost due to manufacturing efficiencies, and you guys also idled a few plants. And can you give us an idea of what those two cost benefits are? And the non-recurrence of those efficiencies and benefits? And how that all effects 2011 on a dollar basis?

Yes. I mean, we have not framed either those two issues in terms of specific dollars and cents. I think I've said on prior calls, is that when you're looking for, kind of sequential improvement in a business, in a business of Insulation's size, there's a $1 billion plus business. But a couple million dollars of performance issues in any given quarter kind of swing you from making progress to not making progress. So we've been very focused on small performance details inside Insulation and trying to demonstrate that we would make progress. I wouldn't characterize the performance issues that we really experienced through the summer of 2010, as being materially impacting our 2010 results on the margin. There was probably enough impact there that might have been the difference between us narrowing our losses and going sideways, but it wasn't the difference between us really getting back to some level of profitability. That was much more market driven and weakness in the market. And then I think today, a bit of new disclosure, because we had not talked about the EcoTouch product line until we made the launch last month at the builders' show. We were spending money in the second half of last year doing some plant conversions, which is both out-of-pocket expense some capital and then learning curve, as you bring in new product into a plant, we operate a little bit below our standards efficiencies for a period of time. We're going to have more of that in the first half of this year, which will be a bit of a headwind that will offset, maybe some of the gains we might have got by operating better. And then we would expect by the second half of the year, we should have EcoTouch fully into our facilities. We should be operating well. Hopefully, we have a housing market that's helping us a little bit with tailwind. And slow improvement in housing could contribute to maybe some second half upside force in Insulation.

And then just a quick question on Composites, too. With tariffs in Europe not being renewed, and does this impacts 2011 profitability at all, does it have any concerns about that?

Yes. I'm glad you brought that up. We've talked about that. I believe we talked about that on the third quarter call that following the financial crisis in 2008 and into 2009, there was some very, very aggressive pricing from some of the Chinese imports into Europe and that actually in 2010, the European current competition authorities have proposed a provisional anti-dumping duty in Europe, that was about 42% on all Chinese imports. At the time we had said that, that was provisional. And that there was going to be, I think, a six-month period of time where that was going to be considered by the competition authorities. In terms of determining whether or not a permanent or a longer-term anti-dumping duty should be put in place or not. We've seen, we've heard news on that over the course of the last couple of months. In fact, there has been progress to put in place a five-year anti-dumping duty of 14%, that's not finalized, that will be finalized in March. But certainly, all the indications, as it moves through the European Union kind of administratively is that, that has support and that will likely happen, I think would be fair to say. That's obviously below the 42%, but we do think that, that's sufficient for us to get what we need in Europe, which is a level playing field and fair pricing. So that's going to give us an opportunity for us to continue to improve our European operations. We've been pretty clear, even with a 42% duty that didn't give us the kind of pricing leverage that might on the surface seem like we would have. Because we have to keep our European customers competitive, and if we're not doing a good job of keeping them competitive, they can compete on what is a global market. So what really defines pricing in Europe is our customers' need is just to stay competitive; our need to therefore keep them competitive. I think this 14% duty will take away some of the distortions that were in the market from very well Chinese prices and get it back to a level playing field.

Your next question comes from the line of Joshua Pollard with Goldman Sachs.

The first is on Roofing. A recent price increase was pushed out anon, can you talk about what you all think drove that decision? And whether or not the industry dynamic within Roofing may or may not be changing?

Yes, Joshua. We have a March 1 price increase that was announced earlier this year. And I think at the time of that announcement, most, if not all, of the major players in the industry had announced pricing action. So we felt pretty good about that price increase. There are some competitors that have announced that they're going to delay the implementation of that price increase. We have, at this moment, I do not believe made any formal announcement about what we intend to do on that. We don't sit here today and believe that, that price increase was necessarily definitively pushed out. There's certainly, as I alluded to in my previous answer, there are some shipping issues and basic logistics issues because of the snow that's on the ground. And certainly, in any price increase, we want to put our customers in an ability that they can take in the inventories that they want to take in at the agreed-to prices, while at the same time, making sure that price increases in the market have some integrity and that they're actually going to go happen. So we're managing that at this moment, but I would not characterize the announcement of a couple of the competitors to move the effective date of their price increase to April, as necessarily a movement industry-wide, to move the price increase to April.

My other question is around Insulation. You guys put out the 10% guidance for the top line. Can you split what portion of that you expect to be from industry improvement versus the benefits that you guys will see from signing the supply agreement with Masco?

Yes. We probably wouldn't split it out that specifically. But we talked in other calls about the fact that our Insulation business competes in a lot of different end user markets with different dynamics. Obviously, our businesses in China and some of the other developing countries have continued to grow through this period, so we would see growth there. We did comment earlier, Duncan commented that, we did gain some price in the second half of last year, so as you annualize that, that's going to contribute to the top line growth. We are forecasting most of the people who forecast off of, say, blue-chip would be forecasting that we'll see some increase in housing starts in the second half of the year, which would contribute to top line growth. And then us regaining a primary supplier position with Masco, as that becomes implemented through the year, we'll get some volume growth out of that. So I think it's a lot of pieces contributing to it, and I wouldn't necessarily characterize it as just the opportunity we see with Masco as driving that top line.

Just following up on that question. At what point in the year would you expect to be, at a full run rate with Masco? And also, at what point in the year would you expect to be at a full run rate with EcoTouch?

Well, let me take the second half of your question first, which is our EcoTouch conversion is complete across Canada. So today, that is the product line that we're shipping in Canada. We are in process, we have five major insulation plants in the U.S. that would be making that product. We are in conversion on two of those at this moment, and I believe our expectation is that on the residential side of the business, the products that go into residential and building insulation markets that we would be complete really by the end of the second quarter. As it relates to the Masco implementation, I don't think that they disclosed on their timeline or we disclosed -- they disclosed on their call or we disclosed today what that timeline looks like. It's going to be a timeline that works for both of us. And we want to do it in a way that they're going to do it, obviously a branch at a time, which is how these things happen. And we're in the process of working out the implementation plan on making that happen. I certainly would expect it by the end of the year. We'll be to the position with Masco where we believe the agreement calls for.

Your next question comes from the line of Ken Zener with KeyBanc.

I have two questions. One, just kind of a follow-up on the Roofing. And I know Duncan had talked about 4Q to be seasonally weak, and you guys had margin pressure due to the high cost of volume. If you could do refine the statements so we can understand the decline sequentially in margins, relative to fixed cost pricing, as well as the underlying input costs, asphalt, for example.

Yes. So what I was -- this is Duncan. So what we were talking about there, was how margins devolve for the year. The first thing to remember about the year is that it was an unusual year, in terms of how revenue shapes, it's about 60% the first half, 40% the back half and our more normal year is about 50/50. Because fixed costs are pretty much evenly spread through the year, the seasonality that you can see, combined with the unusual shape of 2010, mainly the third and fourth quarters had a lot less revenue, certainly the fourth quarter, very much less revenue than maybe you'd typically get to see. Now also, what shapes the year from a margin point of view, is where production occurs. And production, as I said, was probably in the third quarter quite a lot less than we typically would see in an average year. And therefore, when you look at the fourth quarter, yes, we did see some slight declines in contribution margins, but fundamentally, they remained pretty stable and pretty healthy. But what we did also see was because the sales were down, and also because we were selling some inventory that we've made in the third quarter, which because it was relatively small amount made in the third quarter, absorbed quite a lot of fixed costs. But that inventory was quite high cost inventory, and both of those two factors depressed EBIT margins in the fourth quarter. But having said that, the run rate of contribution margins that we have seen in the fourth quarter, particularly when you take into account some of the pricing actions we have announced in 2011, fully capable of supporting margins that we see as achievable in 2011 of 20%.

Sounds like you obviously got rid of a lot of that higher cost inventory relative to where you are now. So for the Composite, if you could kind of talk, I mean, it sounds like shingles is going to be up modestly. But if you could kind of talk about volume, how you're seeing as your traditional 1.5, 2x GDP or if you could peel the onion back a little bit, talk about Europe, if it's autos how much incremental sales, because I know China was getting seeded. So kind of the real growth from that, because I think that plant’s around 10% of your guys' volume, how win demand is looking, et cetera?

Today, we did say that we envision that 2011 could be another year of double-digit top line growth in Composites. We have been getting some sequential price in Composites, so a portion of that top line growth will come from price actions that were taken in 2010, and then some additional pricing actions that we're working off of for 2011. But the bulk of that will come from underlying tonnage growth or volume growth. I think this story is very similar to what we've really been saying for the last four, five quarters, which is we are seeing recovery in the U.S. and Europe. We're seeing that pretty much month over month, and it's good stable recovery, so we don't think we're seeing any big inventory builds or changes in demand that would cause us to be concerned, that the market is getting ahead of itself. So we feel fairly comfortable with good single-digit volume growth in the U.S. and Europe, but predictably. And then obviously in the developing countries, Brazil, Russia, India, China where we’re very well-positioned, we're seeing growth much better than that. So it's kind of a combination of stronger growth in the BRIC countries which is becoming a higher percentage of our overall mix in the business, just because of their compounding. With Europe and the Americas growing at respectable single-digit levels, with a little bit of price gets us to that double-digit. I think that's fairly consistent with where we've been over the last five quarters, which is really good news. I mean, any time you give us predictable demand and the ability to plan our operations against that and price against that, we tend to be able to deliver good operating leverage.

It sounds like if that's your outlook then, I mean given the fact that you're very explicit around $75 million EBIT growth in Composites, and kind of talk in 20-ish percent for Roofing, would you consider your guidance ultra conservative, similar to -- not ultra but conservative relative to comments you made in prior years, given where we are in the year relative to demand on Roofing and some other seasonal components?

I characterize our guidance kind of the same way we characterize our guidance in every call, which is our best available information at the moment we make the statements. So we weren't super happy in the third quarter call, where we had to come in and put new guidance into the market. But I think we're pretty clear that we had put our best available guidance into the market before that call, and then as a result of what we're seeing in Roofing volumes we are updating that guidance and putting our best available information. I think today, we look at the pieces and feel comfortable that giving a pretty clear indication on Composites was something we wanted our investors to understand. Either on the upside or the downside, either we didn't want investors thinking that we had ran out of gas on Composites, but candidly we didn't want investors thinking we could sustain 75% operating margins, those are pretty heady numbers. We wanted to give a real number that investors could pin to for Composites. And I think, the improvement in Composites, with some of the uncertainty in Building Materials, we believe that $475 million is a good number for 2010.

Your next question comes from the line of Dennis McGill with Zelman & Associates. Dennis McGill - Zelman & Associates: The first question, just on Composites pricing, you kind of touched on it a couple of times, Mike, but just to drill down a little bit more, it seems from the way it was written up that pricing for the year was maybe up in the 3% range and there's some improvements through the year. So can you maybe talk a little bit about what the pricing run rate was to exit the year? And how that maybe varies across the three major regions?

Yes. Let me talk about Composites pricing maybe a little bit more broadly, and then I'll get more specific with your question. But we've said before that our Composites business for good, I mean, I think mostly in the positive, does produce a product line that is specified and engineered into a lot of the applications that our customers use it for. And in a number of cases, our customers have been job quoting or piece quoting something to a customer down the line that might be at a fixed price. So unlike our Building Materials, where price swings tend to be pretty quick and kind of across the product line and across all channels of distribution, on a defined date, our pricing in Composites tends to be a continuous negotiated movement of pricing, relative to our needs for return on capital and relative to our customers' needs for profitability, our need for profitability and availability of supply. So you would see across product lines and across geographies some general trends that were all broadly positive. But if you really dug down by product line, by geography, you might see some pretty big variances based on the facts and circumstances of that specific market. So that said, I think it's fair to say, that with anti-dumping coming in to Europe and giving us some relief from what had been very, very aggressive Chinese pricing, we've been able to really rehabilitate pricing in Europe back to pre-crisis levels. But certainly, have not really realized a lot of positive price relative to where we would have been in '08, but sequentially better. U.S. has been relatively good, if you remember in 2008, following the Vetrotex acquisition. Saint-Gobain had shut down all their Wichita Falls, Texas facility because it really wasn't economic and couldn't compete. So the U.S. really didn't suffer quite as much in the financial crisis because there was capacity coming, at the same time demand was dropping, and so we've seen the U.S. be relatively stable. And then, I would say the developing countries probably is a less about price and more about volumes. So where we're seeing reasonably good volume growth we've also seen capacity come in. We have prices that justify new capacity investments. We have prices where we can make good money. So we haven't been moving pricing nearly as much in those markets, maybe as we have in more the developed countries. Dennis McGill - Zelman & Associates: But it's fair to assume that the pricing momentum, obviously, was accelerating through the year into 2011?

I mean, not necessarily. Again, I would kind of, in our internal books we look at it in the individual segments and the individual pieces. And there are some places where that's true and there's other places where the business is a bit more contractual over the supply-and-demand situation and the product line is a bit looser. So I wouldn't want to have a broad characterization of Composites pricing, that says it's accelerating. Dennis McGill - Zelman & Associates: Second question just has to do with Insulation business. We've been hearing more chatter in the marketplace about spray foam and I think we've touched on this in the past. But can you just update us on your view of spray foam as a challenge for the business? Is it something that you guys are pursuing either internally or potentially through acquisition? Or I guess, how do you think about it broadly over the next couple of years?

Yes. The product, Dennis, is talking about is full-cavity spray foam, where you go into the house and rather than putting a fiber glass batt or blowing fiber glass into the wall, you actually have a two-part foam system that you spray into the wall, it expands inside the wall then you scrape off the overspray, and then put the plasterboard up over the top of that. This is a product that's really been around, probably for the last decade. I would say that at least in our industry analysis, it's a presence in the market on a volume basis. It's probably a bigger presence in the market on a revenue basis, because it's pretty high-priced high cost product line. We would say that given the way the construction market is organized today, where there is still some high-end construction market out there where this product is typically enjoyed more success, and then there's a spotty new construction or track build home market where this product wasn't typically found. We're seeing some reports in the market that would say, spray foams maybe making some progress that we're not sure necessarily we signed up for. So it's something we monitor. We would go back to the fundamentals of how builders build homes, which is we think they're trying to deliver as much energy efficiency and value to the homebuyers they possibly can. I think it's pretty undisputed that fiber glass insulation is the lowest cost per thermal performance product available on the market today. There is a need, as you get to higher levels of energy efficiency, to also seal the home to air infiltration. You can do that a lot of ways. You can do that with House Wraps, you can do that by putting a very thin layer of spray foam into the cavity in a process called flash and batt, you use the spray foam which is higher cost to just seal the cavity, then you put it a batt in over the top of it which is FIBERGLAS Insulation, to give you thermal value on a low cost basis. Or we actually have a system we launched called the EnergyComplete, which is a very safe, easy-to-use foam that you would just use to just seal the home and then we would take FIBERGLAS Insulation and put it over the top of that. Our view over the long term is, in new construction, cost benefit is going to become more important, not less important. So whereas, there were very aggressive mortgage products that maybe a lot of people without equity and without a lot of income to get into expensive homes and therefore, the builders had a lot of pricing power. Obviously, with what we're seeing with the reform in the mortgage market, what we're seeing in terms of people's balance sheets and their need to try to accumulate capital in order to buy a house, that the builders are going to be increasingly focused on, "How do I deliver green and sustainable solutions to my customers, but do it at the best possible cost-benefit?" We think the EcoTouch product that we just launched is in fact the greenest product in the market as well as the best cost-benefit product in the market. So we like our position. Dennis McGill - Zelman & Associates: And if I could just sneak in one clarifying on the Boral acquisition, will that flow through as sort of other income joint venture line? Or what would be the way to consider that for '11?

This is Duncan. You should think about as being essentially a sale of the business with staged proceeds. So as we said, we got $45 million off proceeds for that in 2010, and we anticipate getting some more proceeds in 2014 of at least $45 million. It kind of depends on the performance of the business in 2013. But it has been the sale of the business, and so we'll not go through as a kind of equity-type joint venture, which I think is what you're thinking of, no, it's actually a sale of the business.

The next question comes from the line of Jonathan Ellis with Bank of America Merrill Lynch.

First question is your comment about the Composites pricing in emerging markets, it's really interesting to me, given that we've heard that some of your competitors in China have recently been announcing price increases on some of their composites products. Can you talk at all about pricing in China and whether, I guess broadly speaking, there's more opportunity perhaps in that market this year for price increases relative to some of the other markets?

Yes. It's a good distinction that I'd be happy to talk a little bit about, which is again, kind of a characterization of the composites market that I gave earlier which is, it's not really one homogenous market. I think the same thing would be true in China, which is we have tended to participate in the Chinese market in some of the more highly engineered applications and more highly specified applications, where our global footprint has really broad global specifications into China and our capacities in place with our product lines to meet the specifications. So our business in China has generally operated probably at a higher average price level than the broad Chinese composites market would operate. So when you hear that Chinese competitors in China are moving prices in China, that would probably be more impactful on the broad Chinese market, where we don't have as much of a position and may not spill over, give us a big opportunity in some of the more specified or engineered parts of the market. That said, obviously, we're seeing inflation in China, as is any other manufacturer. Since our strategy in China is very much China for China, that's not bad for us, because if we see some inflation we believe ultimately, if we need to get price in the market to recover cost increases, we'll able to do that. But it is good for us, in terms of the people we compete with who are trying to export out of China, as their cost base goes up, it just makes our European and U.S. assets that much more competitive. So generally, cost inflation and price inflation in China doesn't hurt us in China, could only help us there and actually helps us outside of China. So we think those are generally two good trends.

Second question ties to pricing in the Building Materials, this is sort of a two-part question. The first on Roofing, is your guidance of 20% EBIT margins, does that imply that the price increase you previously announced this year, that 100% of that holds in the market? And then the second question on Insulation, you previously talked about, I think 6% to 12% price increase on some product lines that may take place later this winter, any update on whether you're still planning to put through price increases on Insulation?

Let me start with the Roofing. I think Duncan really provided some good new information to investors today, regarding his comments about contribution margin. And really, the business, as we look at it, we're very focused on what is price, relative to our input costs. So it's very hard in these calls for us to answer a question in terms of how would this specific price increase impact our guidance, because it's always going to be relative to our forecasted evolution of asphalt cost, which may or may not come true also. So we can tell you that as of today, some of the recent activities that we've seen in the oil market, we are starting to see some asphalt cost inflation come through in our business. And we feel that the price increase that's announced, which is a March 1 price increase from Owens Corning, is a justified price increase. It's going to be needed to recover some of the cost inflation that we see. So certainly in our guidance, we would be assuming that pricing actions we take this year and any additional pricing actions that we need to take later in the year relative to cost inflation, that those would be able to recover and offset the input cost that we see, and therefore, sustain our contribution margin and our operating margin. On the Insulation side, there is in fact, a December price increase from 2010, that's been pushed into the first quarter of 2011. I know our team on the ground is working very hard today to help our customers get that price increase in the marketplace, and it's really too early for us to comment on any outlook that we have, in terms of how much of that price we'll realize and by when.

Your next question comes from the line of Bob Wetenhall with RBC.

Sounds like you guys have a lot of momentum into year end, and I just was hoping you could provide a little bit of a roadmap for the opening of the Hangzhou facility and also what you're doing in Russia? And just how incremental you think that's going to be in the next year to two years to the bottom line?

Sure. I mean, I would tell you in Hangzhou, when we pushed ahead with that facility kind of in the darkest hours of '09, there were a lot of times we sat around the table and said, "Do we really need to move forward, is this market going to move forward?" And history had always shown that after the composites market contracted, it would then recover pretty quickly. And we kind of trusted history and we trusted our instincts on that, so let's move forward with the facility. And at the same time, we used capacity that we had in the U.S. and capacity that we had in Europe to build our position in China. So that in fact, when the facility came online late 2010, early '11, that the facility was effectively loaded. That strategy’s just worked out perfectly. So as we sit here today, we're very happy with the timing, we're very happy with the asset we decided to build. A Composites facility goes through what's called heat-up, where you put the batch ingredients into the melter, you have to get it to temperature, you have to start making good glass and then you have to be able to make that good glass into a final form that can ship to our customers. The learning curve on that can take a while. I mean, it could 30, 60, 90 days before we really have a facility that's running at world-class levels. That's probably the activity for us in the first quarter. I would think by the end of the first quarter, we're going to have a low-cost facility in China, we're going to be able to shut down some shipping lanes that exist from North America and Europe to China to save some freight costs. We're going to get some additional product that might be available for us to sell in North America and Europe. And in doing that, it'll start to have a pretty nice impact for our business in 2011. And then following on that, obviously, we'll get a full year impact in 2012. I would expect the Russia expansion, now, that's not a new facility; we had an existing facility there and we've expanded that capacity, which we also believe is very low-cost. I think the Russia expansion will have the same kind of profile into 2012, just with a different magnitude because there's a lot less capacity.

And Keisha, this is Michael, one last question please.

On the Insulation business, guys, the new joint venture with Masco, a lot of positive developments. Any chance you reach breakeven this year?

Yes. Well, first of all, I want to make it very, very clear. It's not a joint venture. So I mean, this is a classic customer-supplier relationship and this is a business that we've known very well for decades; very big and very important insulation contractor in the marketplace. We've not been happy with our position with their Masco contractor services it's been below our overall position in the market. And when you're the biggest manufacturer and the biggest player in the market doesn't have you at your overall level of the market, it's very hard for you to kind of sustain your position in the market where it needed to be. So we would say, that their appointment of us as their primary supplier and the opportunities that we have to work together to improve the business, really gets our business and their business back to a pretty natural state. There's a lot of good things that we could get done by working with Masco. I mean, we are a market leader in builders' building science as are they. We worked together a lot in government affairs to try to move building codes and try to move energy efficiency measures. We know that they've got good integrated systems. So their ERP you can tie it to our ERP, and we can start to hopefully take some costs out of the supply chain. We can really go downstream and try to make sure that we're bringing builders the best, lowest cost, the most energy efficiency solutions in new construction. With all of that, I would say we don't see any scenario where we get back to breakeven at 2011.

And that was our final question. I would now like to hand the call back over to Mr. Michael Murray (sic) [Michael McMurray].

Very good. Thank you for joining us for today's call. With that, I'll turn it back to Mike Thaman, who has a few closing remarks.

Well, as always, I thank everyone for joining us on the call and for your continued interest in our company. Obviously, I think you can sense from the kind of the tone of the conversation today and our outlook for 2011 that we feel very good about the results that we produced in 2010. And I think equally as important, we feel good about the actions we took in 2010 that position us to continue to grow our business and grow our earnings. We've always said that this is a company of great businesses in great industries. Each year, it tends to be a little bit of a different story for each one of our businesses. But in aggregate, I think we've continued to show, over the course of the last 12 quarters, where things have been pretty choppy and pretty tough, that we've got a number of levers that we could turn inside our businesses in order to keep Owens Corning as an entity, as a profitable growing and vibrant company. We're very happy with where our balance sheet is right now. We've got a lot of good balance sheet work done over the course of the last six quarters. We've generated a lot of cash. We have our debt where we like it. So we're feeling very good about our opportunity to invest in our businesses and continue to drive results. Our outlook, we try to make very clear on the call, we think it could be another year of 30% or more growth in earnings per share. It's exciting to think about starting to string together a couple of years at that level of performance. And obviously, we continue to have a lot of work to do, as you listen to the activities and initiatives underway inside the company, to make those kinds of financial results a reality. But it's been really gratifying to see 2010 a little bit in the rearview mirror and realize what we've accomplished as a company. And I think, equally importantly, have a management team and a company that's excited about the opportunities we see for ourselves in 2011. Appreciate your interest and we look forward to talking to all of you in our first quarter call in April. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.